11/06/2006 @ 5:20PM

How To Set Your Consulting Fees

The $101 billion (sales) consulting market is jammed with boutique shops looking to peddle their wisdom. The big question is: What is all that advice worth? Or more important from an entrepreneur’s perspective, what are customers willing to pay?

New entrepreneur consultants tend to undercharge for their services. The mistake is understandable. First, it’s difficult to know the going rate because most consultants vigilantly guard their prices. Second, despite the seemingly small barriers to entry, first-time consultants usually don’t have the strong client relationships that giants like McKinsey & Co.,
Accenture
and
Marsh & McLennan
have built; so, not surprisingly, small fries try to attract attention by competing on price. Finally (and perhaps ironically), many consultants simply underestimate how much a business will cost to run, says Bill Mooney of William Mooney Associates, a consultancy to consultants.

Aside from not being able to pay the electric bill, the other big problem with low-balling out of the gate is that it makes it hard to up the fees later–when problems inevitably arise–without rubbing clients the wrong way. (If you want to make a splash early, try offering the first consultation for free.)

To be sure, consultants’ fees vary depending on location and target industry. But there is a common methodological framework for arriving at an attractive pricing structure–both for the consultant and her customers.

The first issue to consider is how you want to get paid for your services. Should you charge by the hour or by the project? Perhaps you’d rather work “on retainer,” whereby you provide consulting services on a continual basis as demanded? The answer will determine the smoothness of your consultancy’s cash flow.

Typically, information-technology consultants will charge by the hour, while more high-level consultants like strategic planners or management coaches will charge per project. Lawyers, accountants and wealth managers tend to nab those retainers. Brian Conners, president of the Association of Professional Consultants (APC), says charging an hourly or daily rate is easier for first-time consultants. “People just starting out don’t know how to sell a $10,000 project,” he says. At the same time, he adds, customers skittish about working with a new consultant “are typically more comfortable with an hourly arrangement.”

As for how much to charge, strategy consultants usually command the steepest fees, followed by operations-management, human-resources and IT gurus. Most consultants are cagey about their fees, so studying the competition is a bit tricky.

One data point: A partner at a small management or IT consulting firm (maximum sales: $10 million) charges $294 per hour on average, while an entry-level consultant goes for $175 per hour, according to Kennedy Information, a market research firm that publishes comprehensive industry reports that run into the thousands of dollars. Some professional organizations, such as the Institute of Electronic and Electrical Engineers, publish consulting-fee surveys for free online.

Coastal and urban-based consultants can command premiums up to 25% higher than their suburban, Midwestern and Southern counterparts, says Conners. Not surprisingly, the more specific and valuable your expertise, or the more name recognition you have, the more you safely can charge. If you’ve written a book or have worked with a marquee customer, sell it.

No matter what price you charge, be sure to give customers what they paid for. Elaine Biech, a consultant for 25 years and author of The Business of Consulting, offers a 100% money-back guarantee on the advice she provides. Says Biech: “If you don’t believe in yourself, why should your clients?”